Pennsylvania has become the latest state to enact a "pension reform" that isn't really deserving of the name. The bill passed yesterday by the state House of Representatives is now headed to the desk of lame-duck Gov. Ed Rendell, who is expected to sign it.
The pattern by now is familiar: state officials become alarmed by rising pension costs and reports of serious underfunding in state and local plans. Stories of rampant gaming, overtime "spiking" and the like underscore the fundamental moral hazard of the existing system. However, public employee unions squelch any attempt to shift from underfunded, open-ended defined-benefit (DB) plans to simpler, more transparent 401(k)-style defined-contribution (DC) accounts. Instead, lawmakers settle for tweaking benefit levels and retirement ages for a future generation of workers, leaving the basic DB paradigm remains intact.
Massive "savings" are duly predicted over a very long period -- typically 25 to 40 years out -- by subtracting a huge stream of projected future pension payments by taxpayers from the even bigger stream of future payments that would have flowed under existing law. Sponsors ballyhoo the bill as a big deal, and reporters -- who, to be fair, find this stuff dauntingly complex -- obligingly follow the spin (see, for example, the credulous headline and lead sentence of today's Philadelphia Inquirer story. Union leaders pronounce the result "tough" but "responsible." We've seen this play before -- in New York about a year ago, for example.
Pennsylvania's keenest pension watchdogs aren't buying it, though. From the Inquirer report:
The Commonwealth Foundation further details its objections with the bill here -- including, incredibly, a continued assumption that the underfunded state pension system will earn a long-term rate of return of 8 percent on its investments. This rate is crucial to determining the employer share of pension contributions; the lower (and more realistic) the rate, the higher the amount taxpayers must kick in. Other big systems have at least recognize a need to lower their sights. New York's, for example, has knocked its rate-of-return assumption down to 7.5 percent. California's troubled Calpers system, already using a target rate of return below 8 percent, is likely to go lower still.
The new Pennsylvania law also raises actuarial eyebrows by allowing for "smoothing" of investment gains and losses over 10 years -- twice the norm. This, a state commission observes, "has the potential to produce actuarial values of assets that deviate greatly from market values of assets." Which, if anything, is an understatement.
The pattern by now is familiar: state officials become alarmed by rising pension costs and reports of serious underfunding in state and local plans. Stories of rampant gaming, overtime "spiking" and the like underscore the fundamental moral hazard of the existing system. However, public employee unions squelch any attempt to shift from underfunded, open-ended defined-benefit (DB) plans to simpler, more transparent 401(k)-style defined-contribution (DC) accounts. Instead, lawmakers settle for tweaking benefit levels and retirement ages for a future generation of workers, leaving the basic DB paradigm remains intact.
Massive "savings" are duly predicted over a very long period -- typically 25 to 40 years out -- by subtracting a huge stream of projected future pension payments by taxpayers from the even bigger stream of future payments that would have flowed under existing law. Sponsors ballyhoo the bill as a big deal, and reporters -- who, to be fair, find this stuff dauntingly complex -- obligingly follow the spin (see, for example, the credulous headline and lead sentence of today's Philadelphia Inquirer story. Union leaders pronounce the result "tough" but "responsible." We've seen this play before -- in New York about a year ago, for example.
Pennsylvania's keenest pension watchdogs aren't buying it, though. From the Inquirer report:
Matthew J. Brouillette, the president of the conservative Commonwealth Foundation, which opposed the bill, called it a "union pension bailout." He said that, because the pension bill pushes off some payments into the future, when they will cost more, "it is, plain and simple, generational theft."
"We're going to steal from our kids and grandkids in order to pay for a defined-benefit pension plan," said Brouillette, who, like the school boards group, favors a defined-contribution plan.
He contended that it was difficult to get more sweeping pension reforms because "legislators who are voting on the law are members of the problem system that we are trying to reform" - in other words, lawmakers' own future pensions could be affected.
The Commonwealth Foundation further details its objections with the bill here -- including, incredibly, a continued assumption that the underfunded state pension system will earn a long-term rate of return of 8 percent on its investments. This rate is crucial to determining the employer share of pension contributions; the lower (and more realistic) the rate, the higher the amount taxpayers must kick in. Other big systems have at least recognize a need to lower their sights. New York's, for example, has knocked its rate-of-return assumption down to 7.5 percent. California's troubled Calpers system, already using a target rate of return below 8 percent, is likely to go lower still.
The new Pennsylvania law also raises actuarial eyebrows by allowing for "smoothing" of investment gains and losses over 10 years -- twice the norm. This, a state commission observes, "has the potential to produce actuarial values of assets that deviate greatly from market values of assets." Which, if anything, is an understatement.
